RTP » Topics » Post retirement benefits

These excerpts taken from the RTP 6-K filed Apr 9, 2008.
Post retirement benefits
The difference between the fair value of the plan assets (if any) of post retirement plans and the present value of the plan obligations is recognised as an asset or liability on the balance sheet. The Group has adopted the option under IAS 19 to record actuarial gains and losses directly in the Statement of Recognised Income and Expense.

     The most significant assumptions used in accounting for post retirement plans are the long term rate of return on plan assets, the discount rate and the mortality assumptions.

     The long term rate of return on plan assets is used to calculate interest income on pension assets, which is credited to the Group’s income statement. The discount rate is used to determine the net present value of future liabilities and each year the unwinding of the discount on those liabilities is charged to the Group’s income statement. The mortality assumption is used to project the future stream of benefit payments, which is then discounted to arrive at the net present value of liabilities.

     Valuations are carried out using the projected unit method.

      The expected rate of return on pension plan assets is determined as management’s best estimate of the long term return on the major asset classes, ie equity, debt, property and other, weighted by the actual allocation of assets among the categories at the measurement date. The expected rate of return is calculated using geometric averaging.

     The sources used to determine management’s best estimate of long term returns are numerous and include country specific bond yields, which may be derived from the market using local bond indices or by analysis of the local bond market, and country specific inflation and investment market expectations derived from market data and analysts’ or governments’ expectations as applicable.

     In particular, the Group estimates long term expected returns on equity based on the economic outlook, analysts’ views and those of other market commentators. This is the most subjective of the assumptions used and it is reviewed regularly to ensure that it remains consistent with best practice.

     The discount rate used in determining the service cost and interest cost charged to income is the market yield at the start of the year on high quality corporate bonds. For countries where there is no deep market in such bonds the yield on Government bonds is used. For determining the present value of obligations shown on the balance sheet, market yields at the balance sheet date are used.

Details of the key assumptions are set out in note 49 to the 2007Full financial statements.

     For 2007 the charge against income for post retirement benefits net of tax and minorities was US$168 million. This charge included both pension and post retirement healthcare benefits. The charge is net of the expected return on assets which was US$371 million after tax and minorities.

     In calculating the 2007 expense the average future increase in compensation levels was assumed to be 4.7 per cent and this will decrease to 3.7 per cent for 2008 reflecting the increased weighting of lower inflation countries following the Alcan acquisition. The average discount rate used for the Group’s plans in 2007 was 5.4 per cent and the average discount rate used in 2008 will be 5.6 per cent reflecting the weighted average level of discount rates following the Alcan acquisition.

     The average expected long term rate of return on assets used to determine 2007 pension cost was 6.9 per cent. This will decrease to 6.4 per cent for 2008. This reduction results mainly from a lower allocation to equities as a result of the Alcan acquisition.

     Based on the known changes in assumptions noted above and other expected circumstances, the impact of post retirement costs on the Group’s EU IFRS net earnings in 2008 would be expected to increase by some US$198 million to US$366 million. The main reason for this increase is the inclusion of the Alcan pension expense for the full year. The actual charge may be impacted by other factors that cannot be predicted, such as the effect of changes in benefits and exchange rates.

     The table below sets out the potential change in the Group’s 2007 net earnings (after tax and outside interests) that would result from hypothetical changes to post retirement assumptions and estimates. The sensitivities are viewed for each assumption in isolation although a change in one assumption is likely to result in some offset elsewhere.

  EU IFRS  
  US$m  



Sensitivity of Group’s 2007 net earnings to changes in:  
Expected return on assets  
– increase of 1 percentage point 39  
– decrease of 1 percentage point (39 )
Discount rate  
– increase of 0.5 percentage points 7  
– decrease of 0.5 percentage points (6 )
Salary increases  
– increase of 0.5 percentage points (6 )
– decrease of 0.5 percentage points 6  
Demographic – allowance for additional future mortality improvements  
– participants assumed to be one year older 7  
– participants assumed to be one year younger (7 )




The figures in the above table only show the impact on underlying and net earnings. Changing the assumptions would also have an impact on the balance sheet.
     Further information on pensions and other post retirement benefits is given in note 49 to the 2007 Full financial statements.



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Rio Tinto 2007 Annual report 61
Operating and financial report
 
 
 
 

49 POST RETIREMENT BENEFITS continued
Total expense recognised in the income statement

          2007   2006  
  Pension   Other   Total   Total  
  benefits   benefits   US$m   US$m  

Current employer service cost for Defined Benefits (‘DB’) (134 ) (11 ) (145 ) (102 )
Current employer service cost for Defined Contribution benefits within DB plans (106 )   (106 ) (74 )
Current employer service cost for Defined Contribution plans (40 )   (40 ) (21 )
Interest cost (482 ) (34 ) (516 ) (314 )
Expected return on assets 550     550   326  
Past service cost (7 ) 24   17   (7 )
Gains on curtailment and settlement       3  

Total expense (219 ) (21 ) (240 ) (189 )

The above expense is included as an employee cost within net operating costs. It includes the pension expense of Alcan businesses, excluding Packaging, post 23 October 2007.

This excerpt taken from the RTP 20-F filed Jun 27, 2007.
Post retirement benefits
For defined benefit post employment plans, the Group has adopted the option under IAS 19 to recognise the difference between the fair value of the plan assets (if any) and the present value of the plan liabilities as an asset or liability on the balance sheet and to record actuarial gains and losses directly in the Statement of Recognised Income and Expense.
     The most significant assumptions used in accounting for post retirement plans are the long term rate of return on plan assets, the discount rate and the mortality assumptions.
     
The long term rate of return on plan assets is used to calculate interest income on pension assets, which is credited to the Group’s income statement. The discount rate is used to determine the net present value of future liabilities and each year the unwinding of the discount on those liabilities is charged to the Group’s income statement. The mortality assumption is used to project the future stream of benefit payments, which is then discounted to arrive at the net present value of liabilities.
     Valuations are carried out using the projected unit method.
     The expected rate of return on pension plan assets is determined as management’s best estimate of the long term return on the major asset classes, ie equity, debt, real estate and other, weighted by the actual allocation of assets among the categories at the measurement date. The expected rate of return is calculated using geometric averaging.
     The sources used to determine management’s best estimate of long term returns are numerous and include country specific bond yields, which may be derived from the market using local bond indices or by analysis of the local bond market, and country specific inflation and investment market expectations derived from market data and analysts’ or governments’ expectations as applicable.
     In particular, the Group estimates long term expected real returns on equity, ie returns in excess of inflation, based on the economic outlook, analysts’ views and those of other market commentators. This is the most subjective of the assumptions used and it is reviewed regularly to ensure that it remains consistent with best practice.
     The discount rate used in determining the service cost and interest cost charged to income is the market yield at the start of the year on high quality corporate bonds. For countries where there is no deep market in such bonds the yield on Government bonds is used. For determining the present value of obligations shown on the balance sheet, market yields at the balance sheet date are used.
     Details of the key assumptions are set out in note 46 to the 2006 financial statements.
     For 2006 the charge against income for post retirement benefits net of tax and minorities was US$158 million under EU IFRS. Under US GAAP the net cost was US$200 million. These charges include both pension and post retirement healthcare benefits. The charges are net of the expected return on assets which (net of tax and minorities) was US$228 million under EU IFRS and US$209 million under US GAAP.
     In calculating the 2006 EU IFRS expense the average future increase in compensation levels was assumed to be 4.7 per cent and the same rate will be used for 2007. For US GAAP, the 2006 average future increase in compensation levels was assumed to be 4.6 per cent and this will remain at 4.6 per cent for 2007. For EU IFRS, the average discount rate used for the Group’s plans in 2006 was 5.0 per cent and the average discount rate used in 2007 will be 5.4 per cent. This increase is attributable to higher bond yields across all regions. For US GAAP, the average discount rate used for the Group’s plans in 2006 was 5.2 per cent and the average discount rate to be used in 2007 will be 5.4 per cent. This is also due to higher bond yields.
     For both EU IFRS and US GAAP, the average expected long term rate of return on assets used to determine 2006 pension cost was 6.3 per cent. This will increase to 6.9 per cent for 2007. This is due to an increase in bond yields and a change in the methodology for setting the expected return on equity. Previously, the expected return on equities was set by reference to a fixed margin above inflation. This will be amended for 2007 so that the expected return on equities will be set by adding a risk premium to the yield on government bonds. This methodology is more consistent with that used by other major organisations and is considered to be more theoretically robust.
     Based on the known changes in assumptions noted above and other expected circumstances, the impact of post retirement costs on the Group’s EU IFRS net earnings in 2007 would be expected to decrease by some US$26 million to US$132 million. The impact of post-retirement benefits on the Group’s US GAAP net earnings in 2006 would be expected to decrease by some US$28 million to US$172 million. The actual charge may be impacted by other factors that cannot be predicted, such as the effect of changes in benefits and exchange rates.
     The table below sets out the potential change in the Group’s 2006 net earnings (after tax and outside interests) that would result from hypothetical changes to post retirement assumptions and estimates. The sensitivities are viewed for each assumption in isolation.

 

Rio Tinto 2006 Form 20-F 86

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   EU IFRS    US GAAP   
Sensitivity of Group’s 2006 net earnings to changes in: US$m    US$m   




 
Expected return on assets            
– increase of 1 percentage point 26    24   
– decrease of 1 percentage point (26 ) (24 )
Discount rate            
– increase of 0.5 percentage points 1    8   
– decrease of 0.5 percentage points (1 ) (8 )
Salary increases            
– increase of 0.5 percentage points (4 ) (6 )
– decrease of 0.5 percentage points 4    6   
Demographic – allowance for additional future mortality improvements            
– overall increase of 5% in benefit obligation (11 ) (18 )
– overall decrease of 5% in benefit obligation 11    18   




 

The figures in the above table only show the impact on net earnings. Changing the assumptions would also have an impact on the balance sheet.
     The impact on cash flow in 2006 of the Group’s pension plans, being the employer contributions to defined benefit and defined contribution pension plans, was US$172 million. In addition there were contributions of US$19 million in respect of unfunded healthcare schemes. Contributions to pension plans for 2007 are estimated to be around US$8m higher than for 2006. Healthcare plans are unfunded and contributions for future years will be equal to benefit payments and therefore cannot be predetermined.
     Further information on pensions and other post retirement benefits is given in note 46 to the 2006 financial statements.

This excerpt taken from the RTP 6-K filed Mar 12, 2007.

46 POST RETIREMENT BENEFITS

Description of plans
The Group operates a number of pension and post retirement healthcare plans around the world. Some of these plans are defined contribution and some are defined benefit, with assets held in separate trustee administered funds. Valuations of these plans are produced and updated annually to 31 December by independent qualified actuaries.

This excerpt taken from the RTP 20-F filed Jun 23, 2006.
Post retirement benefits
For EU IFRS reporting of defined benefit post-employment plans, the Group has adopted the option under IAS 19 to recognise the difference between the fair value of the plan assets (if any) and the present value of the plan liabilities as an asset or liability on the balance sheet and to record actuarial gains and losses directly in the Statement of Recognised Income and Expense.
     Under US GAAP post retirement benefits are accounted for in accordance with Financial Accounting Standard Nos. 87 and 106 under which gains or losses outside a ten per cent fluctuation corridor are spread.
     The most significant assumptions used in accounting for post retirement plans are the long term rate of return on plan assets, the discount rate and the mortality assumptions.
     The long term rate of return on plan assets is used to calculate interest income on pension assets, which is credited to the Group’s income statement. The discount rate is used to determine the net present value of future liabilities and each year the unwinding of the discount on those liabilities is charged to the Group’s income statement. The mortality assumption is used to project the future stream of benefit payments, which is then discounted to arrive at a net present value of liabilities.
     
Valuations are carried out using the projected unit method.
     The expected rate of return on pension plan assets is determined as management’s best estimate of the long term return on the major asset classes, ie equity, debt, real estate and other, weighted by the actual allocation of assets among the categories at the measurement date. The expected rate of return is calculated using geometric averaging.
     The sources used to determine management’s best estimate of long term returns are numerous and include country specific bond yields, which may be derived from the market using local bond indices or by analysis of the local bond market, and country specific inflation and investment market expectations derived from market data and analysts’ or governments’ expectations as applicable.
     In particular, the Group estimates long term expected real returns on equity, ie returns in excess of inflation, based on the economic outlook, analysts’ views and those of other market commentators. This is the most subjective of the assumptions used and it is reviewed regularly to ensure that it remains consistent with best practice.
     For EU IFRS, the discount rate used in determining the service cost and interest cost charged to income is the market yield at the start of the year on high quality corporate bonds. For countries where there is no deep market in such bonds the yield on Government bonds is used. For determining the present value of obligations shown on the balance sheet, market yields at the balance sheet date are used.
     
The discount rate under US GAAP is the implied yield available on AA rated corporate debt at the measurement date.
     The rates used for both 2004 and 2005 are set out in Note 49 to the 2005 Financial Statements for EU IFRS accounting and in Note 52 for US GAAP.
     For EU IFRS, the average expected long term rate of return on assets used to determine 2005 pension cost was 6.8 per cent . This will decrease to 6.3 per cent in 2006. For US GAAP, the average expected long term rate of return on assets used to determine 2005 pension cost was 6.7 per cent and this will decrease to 6.2 per cent in 2006. In both cases, this is primarily because of a decrease in expected long term nominal equity returns.
     In calculating the 2005 EU IFRS expense the average future increase in compensation levels was assumed to be 4.7 per cent and the same rate will be used for 2006. For US GAAP for 2005, the average future increase in compensation levels was assumed to be 4.6 per cent and this will remain at 4.6 per cent for 2006.
     For EU IFRS, the average discount rate used for the Group’s plans in 2005 was 5.4 per cent and the average discount rate used in 2006 will be 5.0 per cent. The decrease is attributable to lower corporate bond yields. For US GAAP, the average discount rate used for the Group’s plans in 2005 was 5.7 per cent and the average discount rate used in 2006 will be 5.2 per cent, the decrease is again attributable to lower corporate bond yields.
     For 2005 the cost in relation to post retirement benefits net of tax and minorities was US$170 million under US GAAP. Under EU IFRS, the net cost was US$121 million. These costs include both pension and post retirement healthcare benefits. Within these costs, the expected return on assets net of tax and minorities was US$209 million under US GAAP and US$228 million under EU IFRS.
     
Based on the known changes in assumptions noted above and other expected circumstances, the impact of post

 

Rio Tinto 2005 Form 20-F 54

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retirement costs on the Group’s EU IFRS net earnings in 2006 would be expected to increase by some US$5 million to US$126 million. The impact of post-retirement benefits costs on the Group’s US GAAP net earnings in 2006 would be expected to decrease by some US$6 million to US$164 million. In both cases, the actual charge may be impacted by other factors that cannot be predicted, such as the effect of changes in benefits and exchange rates.
     Under US GAAP, there are net unrecognised losses in relation to the Group’s post-retirement benefit plans of US$259 million at 31 December 2005 net of tax and minorities. This will be charged to earnings over the average remaining service life of employees in the plans to the extent that losses exceed the 10% corridor on a plan by plan basis. The 2006 impact on the Group’s US GAAP net earnings will be a cost of US$19 million compared to a cost of US$26 million in 2005.
     The table below sets out the potential change in the Group’s 2005 EU IFRS and US GAAP net earnings (after tax and outside interests) that would result from hypothetical changes to post retirement assumptions and estimates. The sensitivities are viewed for each assumption in isolation although a change in one assumption is likely to result in some offset
elsewhere.

  EU IFRS   US GAAP  
  US$m   US$m  




 
Sensitivity of Group’s 2005 net earnings to changes in:        
Expected return on assets        
– increase of 1 percentage point 25   23  
– decrease of 1 percentage point (25 ) (23 )
Discount rate        
– increase of 0.5 percentage points (1 ) 10  
– decrease of 0.5 percentage points 1   (13 )
Salary increases        
– increase of 0.5 percentage points (5 ) (7 )
– decrease of 0.5 percentage points 5   7  
Demographic - allowance for additional future mortality improvements        
– overall increase of 5% in liability (13 ) (24 )
– overall decrease of 5% in liability 13   23  




 
Note
US GAAP sensitivities include the effect of the amortisation of unrecognised gains and losses, where applicable. Under EU IFRS the effect of changes in actuarial assumptions is taken to equity.

The figures in the above table only show the impact on net earnings. Changing the assumptions would also have an impact on the balance sheet.
     The impact on cash flow in 2005 of the Group’s pension plans, being the employer contributions to defined benefit and defined contribution pension plans, was US$173 million. In addition there were contributions of US$26 million in respect of unfunded healthcare schemes.
     In relation to pensions, it is currently expected that there will be no significant regular employer or employee contributions to the UK plan in 2006. The next formal valuation of the Rio Tinto Pension Fund is due with an effective date of 31 March 2006. The results of the valuation will be available later in the year, after which contributions into the fund may be required. Contributions are made to the main Australian plan according to the recommendation of the plan actuary and are primarily to a mixed defined benefit/defined contribution type arrangement. In North America, contributions are agreed annually in nominal terms. Whilst contributions for 2006 are yet to be determined, contributions in the UK, Australia and Africa are expected to be broadly in line with 2005 contributions. Contributions for 2006 are expected to be around US$20 million higher than in 2005 for Canadian plans and around US$40 million lower than in 2005 for US plans.
     Further information under EU IFRS and US GAAP for pensions is given on pages A-82 to A-85 and A-101 to A-104, of the 2005 Financial statements, respectively.

This excerpt taken from the RTP 6-K filed Apr 6, 2006.
Post retirement benefits
Under UK GAAP, the Group applied SSAP 24, Accounting for Pension Costs, under which post retirement benefit surpluses and deficits were spread over the expected average remaining service lives of relevant current employees. Under IAS 19 the basis of calculating the surplus or deficit differs from SSAP 24. In addition, IAS 19 permits three alternative ways in which the surplus or deficit can be recognised. The Group has chosen to recognise actuarial gains and losses directly in shareholders’ equity via the Statement of Recognised Income and Expense (SORIE). The annual service cost and net financial income on the assets and liabilities of the Group’s post retirement benefit plans are recognised through earnings.

This excerpt taken from the RTP 20-F filed Jun 27, 2005.

Post Retirement benefits

Information in respect of the net periodic benefit cost and related obligation determined in accordance with US Statements of Financial Accounting Standards 87, 106 and 132 is given below. The measurement date used to establish year end asset values and benefit obligations was 30 September 2004. The previous measurement date, used to determine 2004 costs, was 30 September 2003.

Benefits under the major pension plans are principally determined by years of service and employee remuneration. The Group’s largest defined benefit pension plans are in the UK, Australia, the US and Canada and a description of the investment policies and strategies followed is set out below

In the UK and the US, the investment strategy is determined by the pension plan trustee and investment committee respectively, after consulting the company. Agreed investment policies aim to ensure that the objectives are met in a prudent manner, consistent with established guidelines. The investment objectives include generating a return that exceeds consumer price and wage inflation over the long term. Ranges for the proportions to be held in each asset class have been agreed; a substantial proportion of the assets is invested in a spread of domestic and overseas equities, with a smaller proportion in fixed and variable income bonds, cash and, in the US, real estate. Risk is managed in various ways, including identifying investments considered to be unsuitable and placing limits on some types of investment. In particular, the funds are not allowed to invest directly in any Rio Tinto Group company.

In Australia, the investments reflect the various defined benefit and defined contribution liabilities and are primarily in Australian and overseas equities and fixed interest stocks.

At 30 September 2004, funded pension plans held assets invested in the following proportions:

  UK target   US target*   Group actual  
  2004   2003   2004   2003   2004   2003  
Equities 45%-85%   45%-85%   65%   65%   66%   65%  
Debt securities 15%-45%   15%-45%   30%   30%   26%   27%  
Real estate     5%   5%   3%   3%  
Other 0%-10%   0%-10%   -   -   5%   5%  
                         
*plus or minus 5%                        

The expected rate of return on pension plan assets is determined as management’s best estimate of the long term return of the major asset classes – equity, debt, real estate and other – weighted by the actual allocation of assets among the categories at the measurement date.

Pension plan funding policy is based on annual contributions at a rate that is intended to fund benefits as a level percentage of pay over the working lifetime of a plan’s participants, subject to local statutory minimum contribution requirements. Details of anticipated contributions in 2005 are set out in the FRS17 transitional disclosures on page A-56.

Assumptions used to determine the net periodic benefit cost and the end of year benefit obligation for the major pension plans varied between the limits shown below. The average rate for each assumption has been weighted by benefit obligation. The assumptions used to determine the end of year benefit obligation are also used to calculate the following year’s cost.

  2004 Cost**   Year end benefit obligation
 
 
Discount rate 5.4% to 9.5% (Average: 5.9%)   5.2% to 9.5% (Average: 5.6%)
Long term rate of return on plan assets 6.3% to 11.0% (Average: 6.6%)   6.3% to 7.9% (Average: 6.7%)
Increase in compensation levels 3.7% to 6.5% (Average: 4.2%)   4.0% to 6.5% (Average: 4.6%)
       
** 31st December 2003 year end benefit obligations were measured on the same assumptions as the 2004 cost.

The actuarial calculations in respect of the UK plans assume a rate of increase of pensions in payment of 2.9 per cent per annum at the year end. This assumption is consistent with the expected rates of return and salary increase assumptions in the respective valuations. Appropriate assumptions were made for plans in other countries.

Other post retirement benefits are provided to employees who meet the eligibility requirements, and their beneficiaries and dependants, through unfunded self-insurance arrangements. The majority of these plans are for employees in the United States. The plans are non-contributory, although some contain an element of cost sharing such as deductibles and co-insurance.

In the US, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 provides an employer subsidy beginning in 2006. The Group's post retirement medical plans are expected to be eligible for this employer subsidy. Therefore, in accordance with FASB Staff Position 106-2, the change in Accumulated Post Retirement Benefit Obligation (APBO) due to the estimated impact of the employer subsidy has been treated as a one-off gain that offsets any net accumulated unrecognised loss. This reduction in APBO in turn reduces the net periodic post retirement benefit cost due to corresponding reductions in the service cost, interest cost, and the amortisation of the net accumulated loss.

The weighted average assumptions used in determining the costs and year end benefit obligation for the major post retirement benefit plans other than pension plans were as shown below:

  2004 Cost**   Year end benefit obligation

 
Discount rate 5.4% to 9.5% (average 6.4%)   5.2% to 9.5% (average 6.1%)
Average healthcare cost trend rate      
- trend in first year 6.1% to 11.2% (average 10.6%)   6.4% to 10.5% (average 10.1%)
- reducing to long term rate by 2011 4.6% to 9.5% (average 5.5%)   5.0% to 7.5% (average 5.3%)
       
** 31st December 2003 year end benefit obligations were measured on the same assumptions as the 2004 cost.
This excerpt taken from the RTP 6-K filed Mar 17, 2005.
o   Post retirement benefits
In accordance with SSAP 24, the expected costs of post retirement benefits under defined benefit arrangements are charged to the profit and loss account so as to spread the costs over the service lives of employees entitled to those benefits. Variations from the regular cost are spread on a straight line basis over the expected average remaining service lives of relevant current employees. Costs are assessed in accordance with the advice of qualified actuaries.

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